Episode 32 The Snap Inc. IPO

Summary Notes


In episode 32 of Acquired, hosts Ben Gilbert and David Rosenthal discuss Snapchat's highly anticipated IPO, analyzing its positioning as a camera company and its pivot away from being just a social network. The episode delves into Snapchat's narrative, contrasting their self-portrayal as an innovative brand advertising business with media skepticism about user growth and infrastructure costs. They also highlight CEO Evan Spiegel's product genius and how the IPO's success will rely on Snapchat's potential to innovate beyond what Facebook can replicate. Additionally, the episode features a sponsorship from Pilot, an accounting firm for startups, and explores the implications of Snap's unique voting structure, where public investors hold no voting power, a move that secures founder control but raises questions about investor influence.

Summary Notes

Misuse of the Word "Literally"

  • Discussion of how the word "literally" is often used incorrectly to mean "figuratively."
  • Merriam-Webster added a definition to "literally" that encompasses its use to mean "figuratively."

"But last year, the whatever Merrin Webster added an additional definition to literally to mean figuratively. So it literally means the sum total of everything that it means and everything that it doesn't mean."

This quote highlights the evolving nature of language and how dictionaries respond to changes in usage, even when such changes may be controversial or contradict traditional definitions.

Introduction to Acquired Podcast Episode 32

  • Episode 32 of the Acquired podcast focuses on the Snapchat IPO.
  • Hosts Ben Gilbert and David Rosenthal introduce the topic as significant and highly anticipated in the technology world.
  • Recording takes place 21 hours after Snapchat's trading began.

"Welcome to episode 32 of Acquired, the podcast where we talk about technology acquisitions and ipos. I'm Ben Gilbert." "And I'm David Rosenthal." "And we are your hosts. Today's episode is the Super bowl for our world, the Snapchat IPO."

The quotes introduce the hosts and set the stage for the episode's focus on Snapchat's IPO, emphasizing its importance in the tech industry.

Sponsorship from Pilot

  • Pilot is a sponsor and partner of the Acquired podcast.
  • Pilot provides accounting, tax, and bookkeeping services for startups and growth companies.
  • The company is backed by prominent investors and serves a broad range of clients, including well-known startups.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."

The quote explains Pilot's role as a comprehensive financial services provider for startups, highlighting its growth and status within the industry.

Pilot's Value Proposition

  • Pilot allows companies to focus on their core business by outsourcing accounting tasks.
  • The service aligns with the principle that companies should concentrate on what makes their product unique and outsource non-core activities.
  • Pilot handles various financial operations, enabling companies to avoid risks associated with financial management.

"And accounting is like example number one of what he's talking about. Every company needs it. It needs to be done by a professional. You don't want to take any risk of anything going wrong, but at the same time, it has zero impact on your product or customers, things you do uniquely well."

The quote emphasizes the importance of professional accounting services for companies and how outsourcing such tasks allows businesses to focus on their core offerings without compromising on financial accuracy or compliance.

Listener Engagement on Acquired Podcast

  • The hosts discuss reading iTunes reviews on the show and encourage listener engagement.
  • Mention of the Acquired podcast's Slack community, which boasts hundreds of members discussing M&A, IPOs, and tech in general.
  • The community contributes content and insights to the show.

"So if you like the show and want us to read your comment on the air, leave a review on iTunes. And we've also got a slack. I just looked, we are 475 strong of people hanging out talking m and a ipos tech in general."

This quote is a call to action for listeners to engage with the show by leaving reviews and joining the Slack community, illustrating the interactive nature of the podcast and its community-driven content.

Snapchat's History and IPO

  • Snapchat's early history, including a $3 billion acquisition offer from Facebook, is revisited.
  • The episode focuses on Snapchat's developments since the last coverage, including product launches and business milestones.
  • Snapchat's revenue growth and the launch of their ad API are highlighted.

"But we talked about this what if acquisition where Facebook made a $3 billion." "Made a $3 billion offer to buy Snapchat back in. Shoot, I'm blank. It was the end of 2013, right?"

These quotes reference Facebook's significant offer to acquire Snapchat, setting the context for discussing Snapchat's growth and strategic decisions leading up to the IPO.

Snapchat's Innovations and User Growth

  • Snapchat introduced features like Discover, lenses, geofilters, chat updates, memories, Bitmoji integration, and spectacles.
  • User growth slowed in the last six months, potentially due to Instagram launching Instagram Stories.
  • The S-1 filing for Snapchat's IPO is recommended for its clear and compelling writing, reflecting the company's personality.

"They launched Discover, which then became publisher stories. They launched lenses, they launched geofilters, they launched a whole ton of new chat features, which are actually pretty cool."

The quote lists various features Snapchat developed, showing the company's continuous innovation and adaptation to remain competitive in the social media space.

Snapchat's Voting Structure and CEO Award

  • Snapchat's IPO introduced a unique voting structure where public shareholders have no voting rights.
  • CEO Evan Spiegel received a "CEO award" granting him an additional 3% of the company upon the IPO's completion.

"So this has literally never happened before. Companies have gone public with dual class, or even three classes of share structures that allowed management and founders to retain effective voting control of the company."

This quote explains the unprecedented nature of Snapchat's voting structure in its IPO, which grants no voting rights to public shareholders, consolidating control with the founders.

Snapchat's IPO Pricing and Market Response

  • Snapchat priced its IPO at $17 per share, with a market cap of $24 billion.
  • The stock experienced a 44% increase on its first day of trading, resulting in a market cap of $34 billion.

"And then yesterday, on Thursday, which, yeah." "You're right, that is an upround from their previous financing, despite talks of that share range would have been a down round and that would have been kind."

The quotes discuss the IPO's pricing and the positive market response, indicating strong investor interest and a valuation increase from the last private financing round.

Successful IPO and Market Reaction

  • Snap's IPO has been deemed successful with a significant price increase post-launch.
  • Despite a delay in trading, it was not due to technical issues like Facebook's IPO.
  • Snap's IPO was priced at $17 but started trading at $24, indicating strong demand and positive momentum.
  • The IPO pricing strategy resulted in Snap leaving money on the table, benefiting early IPO investors with immediate gains.

"So far, a successful IPO. We have not had any Facebook like disasters."

This quote highlights the positive market reception of Snap's IPO and contrasts it with Facebook's problematic IPO, emphasizing the lack of technical issues and the immediate price increase as indicators of success.

"Snap left a good amount of money on the table, about a billion dollars on the table, by not initially setting it in that 23 $24 range."

This quote points out the potential financial downside of Snap's conservative IPO pricing for the company itself, suggesting that a higher initial price could have captured more capital for Snap.

Snap's Strategic Positioning as a Camera Company

  • Snap positions itself as a camera company rather than a social network or app company.
  • The strategic positioning aims to differentiate Snap from competitors like Twitter and redirect investor expectations.
  • Snap's high market cap relative to its revenue is justified by its innovative approach to camera technology and future potential.
  • The company focuses on transforming the camera experience and being a full hardware, software, and services stack.

"Snap is a camera company, and you don't even know what a modern camera company looks like."

This quote reflects Snap's bold redefinition of its identity, challenging the traditional concept of a camera company and setting the stage for innovation in the field.

"They want you to buy on the idea and hold on the idea that they're going to continue to do that and reinvent the camera for the future."

This quote explains Snap's long-term strategy to attract investors who believe in the company's vision of continuous innovation and reinvention of camera technology.

Snap's Narrative vs. Media and Investor Narrative

  • Snap presents a narrative through its S-1 filing and roadshow, positioning itself uniquely in the market.
  • The company's narrative focuses on being a camera company, targeting brand advertising, and highlighting the innovative leadership of Evan Spiegel.
  • Contrarily, the media and investor narrative is more skeptical, focusing on user growth challenges, particularly due to competition from Instagram.

"The narrative that Snap has been trying to tell over the past month and the narrative that the media and the investor press has been telling."

This quote introduces the concept of differing narratives—the company's self-portrayed image versus the perception shaped by media and investors.

"They don't want investors to buy this IPO based on the product. Right now, the social graph right now, the growth rates in the last six months, they don't want to be priced on any of that."

The quote indicates Snap's intention to steer investor focus away from current metrics and towards belief in the company's innovative future potential.

Snap's Focus on Brand Advertising

  • Snap distinguishes itself from Facebook and Google by focusing on brand advertising rather than direct response advertising.
  • The company targets television's broad reach and engagement, rather than granular targeting and conversion optimization.
  • Snap emphasizes user engagement, arguing that it rivals the engagement levels of television, which has historically been a dominant advertising medium.

"We are attacking tv, not print media."

This quote underscores Snap's strategic focus on competing with television advertising rather than online direct response advertising, which is more typical of digital platforms like Facebook and Google.

"Snap is making the argument here that as Ben said, you know, they are going after tv, after television."

The quote reinforces Snap's approach to advertising, focusing on engagement and broad reach, similar to traditional TV ads, rather than the highly targeted and measurable methods used by other online platforms.

Evan Spiegel's Role in Snap's Innovation

  • Evan Spiegel is portrayed as a visionary leader with a unique talent for product design and innovation.
  • Snap's narrative credits the company's success to the innovative capabilities of its founders, particularly Spiegel.
  • The company culture encourages internal competition and creativity, which contributes to its innovative output.

"Snap is an innovation company and that we as a company have done these things."

This quote highlights Snap's self-perception as an innovation-driven company, attributing its success to collective efforts rather than solely to Evan Spiegel.

"They have an Apple esque secrecy about them."

The quote draws a parallel between Snap's culture of innovation and secrecy and that of Apple, suggesting that Snap's internal processes may be similar to those of the tech giant in fostering creativity and product development.

User Base and Market Saturation

  • Snapchat has a significant presence in the U.S. but lacks international adoption and monetization.
  • Instagram and Facebook have a much larger user base compared to Snapchat.
  • Snapchat's growth has stalled since Instagram introduced its Stories feature.

"Snapchat's got real good saturation in the US. They have very little adoption in other countries."

This quote highlights Snapchat's strong domestic market presence in contrast to its weak international reach.

"Instagram has added 100 million daily active users. They went from 300 million to 400 million in seven months."

David Rosenthal points out Instagram's rapid growth, contrasting it with Snapchat's stagnation during the same period.

Competition and Innovation

  • Facebook and Instagram have the structural advantage of a large user base and can afford to wait and copy features.
  • Snapchat's potential lies in its ability to innovate and attract new users with unique features.
  • Investors in Snapchat must believe that it can outmaneuver Facebook's ability to replicate its features.

"What Snapchat has going for them is they fundamentally believe that... Snapchat can do things that are more innovative and more interesting in a product sense for new users."

Ben Gilbert suggests that Snapchat's strength lies in its innovative potential, which must be realized to succeed against competitors like Facebook.

"Facebook is the social network... Snap can go after the young... But Facebook and Instagram have everybody."

David Rosenthal discusses the challenge Snapchat faces in competing with Facebook's extensive user base and established social network.

Strategic Positioning and Product Differentiation

  • Snapchat's core user base primarily consists of younger demographics, which is where it has made inroads.
  • Facebook's broad user base across all demographics presents a significant challenge for Snapchat.
  • Snapchat's differentiation strategy revolves around its identity as a camera company and pivoting into markets Facebook may not easily enter.

"Is there something where Snapchat can get up on the side of the canyon and tiptoe along and even waltz past all them, and they can't do anything about it because they can't get up the canyon."

Ben Gilbert uses a metaphor to describe Snapchat's need to find a unique strategic position that Facebook cannot easily counter.

"We're a camera company, and to be a bull on Snapchat right now, you have to believe that they are going to basically pivot the market into a dimension that Facebook can't compete with them on."

David Rosenthal explains that betting on Snapchat requires belief in its ability to redefine the market in ways that give it a competitive edge over Facebook.

Financials and Infrastructure

  • Snapchat's infrastructure costs are high, leading to gross margin negativity.
  • The company relies heavily on Google Cloud and AWS, leading to significant operational expenses.
  • Snapchat's IPO raised capital that could enable new ventures, such as hardware development.

"Snapchat is gross margin negative as well, or was until very recently."

David Rosenthal notes the financial challenge Snapchat faces with costs exceeding revenue, emphasizing the unusual nature of this for a company going public.

"Why don't you have your own infrastructure to buy now? Why don't you invest in your own data centers?"

Ben Gilbert questions Snapchat's reliance on external cloud services, which contributes to its high infrastructure costs.

IPO Performance and Public Perception

  • Snapchat's IPO raised significant capital, reflecting high market interest.
  • The company's valuation and narrative are based more on future potential than current financials.
  • The public market's response to Snapchat's IPO is a test of confidence in the company's leadership and vision.

"This company was gross margin negative... And they are now a 35 billion plus market cap public company."

David Rosenthal emphasizes the contrast between Snapchat's financial position and its high valuation post-IPO, highlighting the speculative nature of the investment.

"It sounds like a seed deck. It sounds like serious... not the sort of ways on which I would be evaluating a public security."

Ben Gilbert compares the narrative-driven valuation of Snapchat's IPO to early-stage venture funding, suggesting a disconnect between typical public market evaluations and the company's current state.

Potential Futures and Hypotheticals

  • Snapchat's cash burn rate necessitated the IPO for continued operations.
  • An acquisition by Facebook or another tech giant was unlikely due to cultural differences and valuation.
  • Snapchat's future could involve acquiring other companies or venturing into new markets.

"They had no choice... They were going to be out of cash if they didn't get this capital infusion."

David Rosenthal explains the financial imperative behind Snapchat's decision to go public, given its cash burn rate and need for capital.

"Why would they pay $35 billion for Snapchat right now?"

Ben Gilbert questions the logic behind a hypothetical acquisition of Snapchat by Facebook, given the latter's successful growth and existing platforms like Instagram and Oculus.

Social Network Advertising

  • Facebook and Instagram dominate social network-based advertising.
  • Facebook achieves economies of scale for advertisers by integrating additional networks into their platform.
  • Advertisers who are familiar with Facebook can easily transition to advertising on Instagram.

Facebook gets these economies of scale for their advertisers by adding additional networks into the portal.

This quote highlights Facebook's strategy of integrating multiple platforms into a single advertising portal, allowing advertisers to efficiently scale their campaigns across different networks.

Market Valuation and Acquisition Strategy

  • Twitter's current market valuation is too high for potential acquisitions.
  • A lower valuation could lead to acquisition interest.
  • Snapchat, with fresh capital and a high market cap, could potentially acquire Twitter.
  • Snapchat could create a single portal for advertising on both platforms.
  • The idea of Snapchat acquiring companies is speculative and may not align with their core business model.

If Snapchat bought Twitter and then enabled advertisers to have a single portal to buy advertisements on both platforms and then sort of went on a spree?

This quote speculates on a strategic move where Snapchat could acquire Twitter to consolidate advertising platforms, although it recognizes potential misalignment with Snapchat's core values.

Snapchat's Media Relationships

  • Snapchat had a relationship with Viacom for channel sales.
  • The relationship's current status is unclear.
  • Snapchat's board includes members with strong ties to Hollywood and media.
  • The company's DNA is intertwined with both Silicon Valley tech and Hollywood media.

The chairman of the board is, I believe it's, is it Michael Litton, I think, who was the Sony entertainment in, as, in many ways, Hollywood and media and television is as core to Snapchat's dna as Silicon Valley.

This quote emphasizes the significant influence of media and entertainment on Snapchat's identity and strategic direction.

Investor Base and Quarterly Earnings

  • Snapchat's investor base may consist of short-term retail investors excited by the IPO hype.
  • The company might face challenges with quarterly earnings due to investor expectations.
  • Amazon successfully cultivated a patient investor base willing to wait for profitability.
  • Snapchat's ability to attract the right investors and withstand scrutiny is questioned.

Did Snapchat ask for the right investors? Did they get the right investors, and will they be able to stand up to the scrutiny of quarterly earnings calls for those investors?

This quote questions whether Snapchat has secured an investor base that aligns with its long-term vision and whether these investors will tolerate the pressures of regular financial reporting.

Technology Waves and Snap's Future

  • Snap originated with the mobile technology wave as a social network.
  • The company's future depends on transitioning to a new technology wave.
  • Snap may be moving towards an augmented reality (AR) or camera wave.
  • Snap's narrative in their S-1 filing positions them beyond a simple social network.

The future of Snap, if it will be the one that they want, is going to be them riding a very different wave.

This quote suggests that Snap's success hinges on its ability to adapt and capitalize on emerging technology trends beyond its original mobile social networking platform.

Network Effects and Virality

  • Snapchat's viral coefficient differs from other social platforms.
  • Snapchat's engagement is high among a small group of users, which could hinder market growth.
  • Other markets may not adopt Snapchat if they lack a user base that connects with existing markets.
  • Comparisons are made to Uber and Airbnb's differing network effects on a global scale.

The viral coefficient of Snapchat is different than the more successful social experiences like Facebook.

This quote discusses how Snapchat's unique user engagement model, which focuses on close communication rather than broad social media reach, may affect its ability to expand into new markets.

Capital Raising and Business Viability

  • Snapchat has raised significant funds, but its gross margin remains negative.
  • The IPO provides capital for product development, but it's uncertain if it will lead to a sustainable business.
  • The discussion includes whether raising capital is a true competitive advantage.

Snap has raised so much money, and now with the IPO, even more money. But they were gross margin negative. That hasn't helped them build a great business thus far.

This quote reflects skepticism about whether Snapchat's fundraising efforts, including the IPO, will translate into a successful long-term business given their current financial performance.

IPO Execution and Future Prospects

  • The grading of Snapchat's IPO execution is separated from the company's overall prospects.
  • The IPO is seen as well-executed, but the long-term impact on the company's trajectory remains uncertain.
  • The conversation includes parallels to Facebook's IPO and its subsequent influence on the company.

This IPO was brilliantly executed by Snap. They told their story so well and positioned themselves perfectly.

This quote praises Snapchat's ability to present a compelling narrative during their IPO process, which resulted in positive short-term performance.

Snapchat's Unique Approach to IPO

  • Snapchat's executives were notably absent from public appearances on IPO day.
  • They chose to spend time at Goldman Sachs and conduct a single interview with the LA Times.
  • The company's approach to the IPO reflects its tendency to diverge from conventional practices.

Spiegel and all the other execs weren't anywhere to be found. They headed over to Goldman Sachs, which was one of their IPO managers, and it wasn't their lead left because Morgan Stanley led the IPO and they hung out there for the day.

This quote highlights Snapchat's unconventional approach to their IPO, choosing to limit their public exposure and media interviews in contrast to typical IPO behavior.

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